Sunday, July 24, 2011

Are there shortcuts to a better democracy? (by Pedja dell'Arno)

In the previous post by my colleague Francesc Trillas, he mentioned Dani Rodrik's criticism of the idea, usually promoted by many economists, of delegating into depoliticized agencies to solve many problems. One of these agencies is the central bank. By strategically delegating into conservative central bankers, the latter could avoid short term pressures to expand the economy, and focus on the narrow objective of keeping inflation low. The idea has been exported to other areas, such as product market regulation, lender of last resort, fiscal policies and others. The worry is that if everything is delegated into depoliticized agencies, what will be the scope of democracy?

Even the idea of central bank independence has been the object of what is called the Posen critique, by which it is doubted that central bank independence causes low inflation, as it was argued by several empirical studies. It could well be that countries with a historically developed preference for low inflation, like Germany, tend to have both low inflation and the institutions that facilitate it, but it is the preferences, and the interest groups that structure them, the key issue. Recent work in behavioral economics on expert judgement places many question marks on the working of expert agencies. Fear of ostracism, herd behaviour, confirmation bias are just a fraction of the systematic problems that plague these agencies just on efficiency grunds, let alone on legitimacy grounds. Independence and expert commissions, nevetheless, are answers to deeply rooted problems that plague democracies, in terms of commitment, complexity, and stability. But delegating into agencies that are separated from the political process creates problems of coordination and leadership that makes many think that the solution to those problems has yet to be found.
Philip Tetlock wrote in 2005 the wonderful book "Expert political judgment: how good is it? how can we know?" The answer to the first question is that it is bad. Experts make frequent and systematic mistakes. One example of these mistakes is the tendency to overestimate benefits and underestimate costs in many mega-projects, both public and private, as explained by the Danish scholar Bengt Flyjbjerg. Advancing towards a better democracy is a difficult and necessary process, and one that has no shortcuts.

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